Financial Markets From Poverty to Power – www.fp2p.org
Part I: What are the latest developments in international capital flowsand financial market regulation?
1 Capital flows to developing countries
Global economic integration accelerated significantly towards the end of the last century. The 1990ssaw a huge increase in the level of international private capital flows, including flows to developingcountries. Private capital flows, in theory at least, should offer considerable benefits for developmentif they flow from capital-rich to capital-scarce countries. In developing countries, capital inflows havebrought much-needed capital for investment as well as technology transfer. Under the rightconditions, capital flows can also help to smooth the business cycle in recipient countries.However, the relationship between private capital flows and development is far from simple. First,private flows to developing countries tend to be highly concentrated with the vast majority of flowsgoing to large, middle-income developing countries while smaller, low-income countries receive verylittle. Secondly, private flows have been shown to carry significant risks for the countries that receivesignificant levels.From the Mexican peso crisis of 1994/1995 onwards, private flows have been shown to be highlyvolatile and easily reversible. These characteristics have made private capital inflows very costly for anumber of developing countries. This was most evident in the financial crises that afflicted Mexico,East Asia (Thailand, Malaysia, Indonesia, South Korea, and the Philippines), Russia, Brazil, andArgentina.One way for developing countries to avoid crises such as these would be to repress capital inflows.But this would mean foregoing the benefits as well as the risks of receiving private capital. It isimportant, therefore, to identify the conditions under which international private capital flows cancontribute towards sustainable development. This would involve both increasing the flow of privatecapital to those countries, which currently receive little or none, and, importantly, ensuring that allflows to developing countries are more stable.The first section of this paper presents an overview of recent trends in private capital flows todeveloping countries and traces the shifting views on the benefits and risks they represent. It thentakes a closer look at the various types of capital flow, analysing their characteristics and relativestability. The second section examines recent developments and current issues in financial marketregulation looking at the public sector bodies and regulatory authorities that play a role in governinginternational financial flows. The third section presents a variety of policy proposals designed toensure a more stable flow of private capital to developing countries.1.1 Private capital flows to developing countries: an overview Private capital flows to developing countries increased dramatically during the 1990s. To give someidea of the scale, net capital flows to all developing countries averaged $30.5 billion a year between1977 and 1982. This figure dropped off sharply during the 1980s debt crisis, before soaring to anannual average of $105 billion between 1990 and 1994.
The reasons for this surge of private capital flows to developing countries exist in both the recipientand source countries. In many developing countries, pro-market economic policy reforms (that is,
Private Finance to Developing Countries: Background Paper Part 1 for the International Finance Chapter of the forthcomingOxfam Poverty Report by Jenny Kimmis. Acknowledgements: I would like to thank the following for their help in the preparationof the three parts of this background paper: John Christensen, Coordinator, Tax Justice Network; Randall Dodd, Financial PolicyForum; Stephany Griffith-Jones, Professorial Fellow, Institute of Development Studies; Ricardo Gottschalk, Fellow, Institute ofDevelopment Studies; Richard Murphy, Tax Research Limited; Stephen Spratt, Head of Research, Intelligence Capital Ltd.; andDavid Woodward, Director Global and National Economies, New Economics Foundation.